California Apparel News

I am frequently asked by designers, production staff, and even owners how to properly calculate a markup from a cost sheet. A markup is simply the amount of money added toyour cost to establish your wholesale price.

The trick to properly marking up a cost is establishing thewholesale price such that when you deduct the markup fromthe wholesale price you end up back at the cost.

For example: If a dress costs $10 to produce and the markup is 25 percent, then the wholesale price will be $13.33. If you just solved the above and your answer was $12.50, you’d better finish reading this article.

The important rule to understanding markups is that you are looking to establish the wholesale price. You are not marking up 25 percent of your cost; you are calculating 25 percent of your wholesale price to get you back to your cost. But you don’t know the wholesale price yet; you only knowthe cost and the markup percentage.

So, how do you figure this out? Very easily: You divide your cost by the reciprocal of your markup: the reciprocal of 25 percent (.25) is 75 percent (.75). The reciprocal is simply calculated by always subtracting your markup from100.

So 100 -.25 = .75. The reciprocal of 40 percent markup is 60 percent; the reciprocal of 35 percentmarkup is 65 percent, and so on.

Next, you turn that percentage into a decimal. .75 percent = 75/100 = .75. To turn any percentage into a decimal, you simply drop the percent sign and move the decimal point two spaces tothe left.

Now, divide the $10 cost by the reciprocal of its markup, 25 percent,which is 75 percent.

On your calculator, enter: 10 ÷ .75. The answer is 13.33. If your markup is 35 percent, you divide 10 by its reciprocal, 65 percent: 10 ÷ .65 = 15.39. For a markup of 40 percent: 10 ÷ .60 = 16.67.

Why must you use the reciprocal? Because the Holy Grail of costing markups is that you are solving for 25 percent of the wholesale price, not 25 percent of the cost. When properly calculated, when you take 25 percent off the wholesale price, you get youroriginal cost.

Here is how you can test for this: Multiply the wholesale price of $13.33 by 25 percent. $13.33 × .25 = $3.33. Now, subtract $3.33 from the wholesale price. $13.33 − $3.33 = $10. You are back toyour cost of $10.

If you mistakenly calculated a $10 cost and got $12.50 as your wholesale price, here is how you can see the mistake: $12.50 wholesale × .25 = $3.13. But $12.50 − $3.13 is $9.37 and not our cost of $10. Test yourself again with a 35 percent markup and a 40 percent markup. $15.39 × .35 = $5.39; $15.39 − $5.39 = $10. $16.67 × .40 = $6.67; $16.67 − $6.67 = $10.

Production staff calculating markups from cost sheets usually like to show a few markups to create different pricing options. So, for example, they may show a 25 percentand a 30 percent markup.

We already know the wholesale price for 25 percent. For 30 percent, the cost of the dress, $10, divided by .70 (the reciprocal) yields a wholesale price of $14.29. To test for this, $14.29 multiplied by .30 (the markup) equals $4.29. $14.29 − $4.29 = $10.

Now, what do you do if your customer says the most they can pay is $13 for your dress, and you want to know what the markup is to ensure there is enough profit built in? Since you know you’re offered ($13) and your cost ($10), calculating the markup percentage is easy: Subtract the cost from the wholesale price. $13 − $10 = $3. Then divide the markup by the wholesale price. $3 ÷ $13 = .23, or a 23 percentmarkup.

Be sure to practice these a few times backward and forward with different costs and different markups. Costing properly can make the difference between profit and loss.

Steven Goldman

Steven Goldman is presidentof Apparel Industry Consulting Services and has more than 20 years of experience in managing and consulting apparel, home furnishings, jewelry and light manufacturing companies. He also serves as part time chief operating officer for growing companies and is a continuing contributor to the California Apparel News. He can be reached at sbgoldman@earthlink.net.